When starting a business, it is important to research the different types of business entities to determine which one is best suited for your business. The most popular business entity is a corporation. Incorporating your business will make the business a legally separate entity from the owner. A corporation can do anything that a legal person can do, such as owning property and signing contracts. It is essential to understand the advantages and disadvantages of incorporating in order to decide what is best for your company.
The Advantages and Disadvantages of Incorporation
Incorporating a business is a popular choice because a corporation limits personal liability in business transactions. Incorporating a business will protect the business owner's personal assets when someone else in the corporation makes a mistake. A corporation is able to sell shares of its stock. This makes the transfer of ownership much easier because owning a stock is equivalent to owning a share in the ownership of the business. Incorporating a business is a good choice if the business owner plans to sell the business in the future or seek investors. A corporation will also have perpetual survivorship, meaning that it will continue to exist even after the death of the founders.
Though there are benefits to incorporating, there are disadvantages as well. Incorporating a business may be a long and extensive process that requires a large amount of money. Furthermore, there are certain accounting and recordkeeping procedures that a corporation must comply which that may be costly. Small businesses and partnerships may not have enough resources to comply with the incorporation procedures and eventually the obligations may outweigh the advantages of incorporating. Furthermore, depending on the financial situation of the company, the taxes may increase after incorporation.
The Process of Incorporating a Business
If you decide to incorporate your business, you must research and comply with state laws. Some states favor corporations more than others. The laws governing corporations may vary between states, but there is a set of general rules to remember.
Every corporation must write a document called the article of incorporation that sets the primary rules that govern the management of a corporation. Some businesses may decide to incorporate out of state and obtain a license to practice elsewhere in order to have more freedom while doing business. The article of incorporation should also define the number of stocks the company is allowed to issue. The document must also list the names of the corporation's decision-makers. The two types of decision makers in a corporation are incorporators and directors. Incorporators are the people responsible for preparing, signing, and filing the articles of incorporation. After the articles of incorporation are filed, the incorporator's duties end and a board of directors will be chosen. The board of directors is usually made up of the business owners who are responsible for making the corporate goals and policies of the business.
As a corporation, the name of the business must be unique and differ from any other business registered to the state. The state of California offers a business name availability search to easily search for similar business names and avoid complications. The business name may not contain any obscene words or words that could be misleading to customer. For example, a business name cannot contain the word "bank" unless it is a financial institution. The business name must also end either with "Incorporated", "Company", "Corporation", or an abbreviation of one of the three.
There are many benefits of incorporating a business such as the ability to sell shares of stock. However, incorporating a business may be detrimental if the business is small does not have the funds to comply with incorporation procedures. Ultimately, it is up to the business owner to decide whether or not it will be beneficial to incorporate their business.